Rising Star Buy: Solazyme

Catch this falling growth stock.

The old saying "Never catch a falling knife" is a common investing adage. However, sometimes you want to catch a fallen growth stock if it's bursting with major potential. That's why I'm buying some more shares of Solazyme(Nasdaq: SZYM) for the Rising Star portfolio I'm managing for Fool.com.

The businessAs I discussed in my original buy article in July, San Francisco's Solazyme is a biofuels company that's turning cheap, plant-based sugars into affordable oil products using microalgae. One of its key differentiators is its use of "indirect photosynthesis" instead of open-pond methods, basically slashing the time it takes microalgae to produce oil to just a few days, and without the use of sunlight.

Although the big story here is affordable biofuels, Solazyme's products have many uses. Take the Solazyme-based beauty products called Algenist, which are available from Sephora, QVC, The Shopping Channel, and J.C. Penney (through the Sephora shops inside J.C. Penney stores).

Here's another odd use: algal flour. Algae-derived flour can be used in diet foods in lieu of conventional flour; its lipid profile is very similar to olive oil. The scientists at Solazyme have been able to make desserts, dips, a milk substitute, and other foods using the flour, resulting in snacks that contain less fat and fewer calories and provide a good source of protein.

In October, joint venture Solazyme Roquette Nutritionals announced its second-phase manufacturing facility in France; it will be able to expand production of Whole Algalin Flour to 5,000 metric tons in 2012. This joint venture already sells nutritional-supplement ingredients under the name Golden Chlorella.

Solazyme has also recently expanded its relationship with Unilever(NYSE: UL), increasing the companies' R&D efforts; should those efforts yield successful products, Unilever would sign a multiyear supply agreement that would help it execute on its Sustainable Living Plan vow to double its business while halving its environmental impact.

Why I'm buyingThis business is highly diversified with great commercial potential, despite its simpler reputation as just another biofuels play. And it hasn't escaped my notice that Solazyme shares have been cut in half since I first bought in. I'm viewing this as a great opportunity to load up on some more. Although Solazyme reported a wider year-over-year quarterly net loss in its recently reported quarter, that wasn't unexpected; this company probably won't be profitable for a while, given its starter status. On the other hand, Solazyme's revenue just about doubled to $8.9 million.

A recent event convinced my Foolish colleague Tim Beyers that Solazyme's the most practical green-energy play right now, and that event has also driven me to buy more Solazyme shares for this portfolio. Several weeks ago, United Continental's (NYSE: UAL) United Airlines sent a Boeing jet on an "Eco-skies" test flight, powered by fuel developed by Solazyme and Honeywell(NYSE: HON). This cleaner fuel was composed of 60% petroleum-based jet fuel and a 40% algae-based biofuel blend.

Meanwhile, the U.S. Navy launched its biggest biofuel test last night, using a blend of half petroleum-based fuel, half Solazyme hydro-processed algal fuel to send a destroyer ship from San Diego up the California coast to Port Hueneme. Although the performance results compared with conventional fuel haven't been reported yet, Solazyme's involved in the military's green efforts and could be a beneficiary of the U.S. Navy's drive to create a "Great Green Fleet" by 2016.

Despite the stock's drop, Solazyme's given plenty more reasons for long-term investors to feel hopeful about its future.

And now, the risksAs I said in my initial buy article, Solazyme is a risky stock. Being cutting-edge can cut both ways, folks, and there's no guarantee as to the extent of its success in the wide-scale commercialization of its business.

Solazyme faces plenty of competition in the nascent biofuels space from other recently public entities, including Gevo(Nasdaq: GEVO), Amyris(Nasdaq: AMRS), and KiOR(Nasdaq: KIOR).

Clearly, Solazyme also faces formidable competition from conventional oil producers, and the price -- and affordability -- of oil makes a major difference in how the market will view algae-based biofuel products. If sustainable fuels and oils are perceived as too dear, there's no guarantee that the marketplace will take into account that negative externalities actually make fossil fuels a high price for the world (and future generations) to pay.

Last but not least, Solazyme is, to a certain degree, at the mercy of speculative investors. Given Solazyme's relatively recent IPO status and its early entry into a nascent space, this stock will definitely require some long-term patience as it develops its business.

Author

Alyce Lomax is a columnist for Fool.com specializing in environmental, social, and governance (ESG) issues and an analyst for Motley Fool One. From October 2010 through June 2015, she managed the real-money Prosocial Portfolio, which integrated socially responsible investing factors into stock analysis. Follow @AlyceLomax